Lenders attitudes to risk and operational capacity affect higher LTVs

Loan-to-value (LTV) has always played a huge role in the mortgage market, although borrowers can often be unaware of the activity swings going on behind the lending scenes and the reasons for these.

Getting back to basics for a moment, LTV is essentially the size of mortgage that a lender is prepared to offer borrowers in relation to the value of the property they are looking to purchase or remortgage. It is expressed as a percentage. For example, if a lender offers a mortgage deal which has a maximum 80% LTV, it means they will lend up to 80% of the property value. And the borrower will need a minimum 20% equity if they are remortgaging or a 20% deposit for a purchase.

The well-publicised reintroduction of physical valuations offered a huge lift to the mortgage market generally. This was swiftly followed by a flood of lenders welcoming new business. After a cautious initial approach, LTV levels initially crept up, but the question is – did some lenders open the higher LTV door a little too soon? Were they surprised by the amount of pent-up demand or were they not quite in the right position to make such moves from a logistical and operational sense?

Only individual lenders can answer this question, although many 90% and some 95% LTV products have been launched and pulled in quick fashion as lenders appear to be struggling to service the influx of enquiries. Or lenders are simply offering them for a limited time through limited distribution channels to help control the supply and demand element.

Highlighting products being pulled from the market is certainly no criticism of these lenders. If service levels can’t be maintained, then this is clearly a sensible move to make. Managing risk and operational capacity has always been a challenge for lenders, and this is proving increasingly difficult in the midst of some uncertain economic conditions. This is reflected in product numbers. Recent data from Moneyfacts revealed that the number of products at 90% loan to value has shrunk to less than a tenth of the figure available pre-lockdown. The data outlined that there were 779 residential deals for borrowers with a 10 per cent deposit in March before social distancing rules came into force, shutting down the market. However, at the end of June, there were said to be just 72 products on offer at 90 per cent LTV, a drop of 91 per cent.

The higher LTV lending battle will be an ongoing theme throughout the rest of 2020, and this will be dictated by a number of issues from an internal and external perspective. There’s no getting away from the fact that borrowers are crying out for higher LTVs. However, there remain question marks over house prices, unemployment figures, not to mention if and when a recession may hit – and how long this may last. From a lending perspective, issues remain over attitudes to risk, operational capacity and servicing the valuation backlog and pipeline cases.

We also have to consider how this period is affecting new and existing borrowers. At Impact Specialist Finance, we’re seeing greater numbers of clients coming through our doors with some form of adverse credit, and this number is only likely to grow. When it comes to servicing these needs, fewer options are currently available. Many specialist lenders are tightening criteria and it’s difficult to know if, and when, the near prime product market will experience any significant improvement. Especially in the midst of lingering uncertainty around exactly how payment holidays will affect credit assessments.

These trends will prove interesting stories to follow as lenders continue to get to grips with demand and how best to service ever-changing borrowing circumstances amidst a variety of Covid-19 and wider economic repercussions. What we do know is that mortgage advisers will prove invaluable in quickly determining whether a case is viable or not and advice has never been more vital than it is today.

Even on Furlough, lenders may consider you for a mortgage.

Just because you’re on the Furlough Scheme(or have been on it), does not necessarily mean you cannot get a mortgage.  Several lenders have issued guidelines to accommodate those on Furlough and will offer mortgage products to them.  Especially clients looking to stay with the same lender and do what is called a ‘product transfer’.  As with all instances, you should speak to a professional broker who can review the whole market.  Staying with your current lender might be the easiest option, and a broker can arrange this for you, but it does not necessarily mean it will be the best rate and option available to you.  Always shop around, loyalty to lenders should be the least of your priorities as they may not be loyal to you!

This also relates to mortgage payment holidays.  A number of lenders have advised they will consider clients who have taken a mortgage payment holiday, depending on their circumstances.  However, many have said they will not assist if the client is still in the mortgage payment holiday so check the lenders requirements.  And we’ve been made aware of instances where a client has applied to a lender for a mortgage payment holiday, whilst also applying to purchase a new property for investment!  This was not taken lightly by the lender and the mortgage payment holiday had to be repaid, before the new mortgage could proceed.  Mortgage payment holidays really are for those who are having difficulties in the current climate.

We’ve also had recent updates from lenders who will look in detail at self-employed clients who have taken out Bounce Back Loans and CBILS funding.  Both cannot, in the main, be used as a deposit for purchasing premises and the lender will want to look at the self-employed clients cashflow forecasts, management accounts and really understand the impact of COVID-19 on their businesses, specifically with regards to how income will recover in the short to medium term.

Finally, the higher loan to value market is like the ‘hokey cokey’.  Some lenders are in, some are out, some are back in and so on.  One lender even launched a 90% lending product for just 48 hours.  Another has launched a ‘tranche’ of funds for the month.  Once it has been used up, that is it.   This is the benefit of using a broker as we will know what lender will offer such products and monitor the very strict deadlines to ensure you get the right deal for your circumstances. 

You'd use a local shop over a supermarket. It should be the same with your mortgage broker.

Through this unprecedented time, I can’t stress enough that you should be using a mortgage broker to review your requirements and help arrange your re-mortgage to cut down your costs.  Yes, you can sometimes go direct to the lender, but is it right for you?  Is there a better rate elsewhere?  Have you read all the small print? How long are you tied in for?  Fixed or Tracker rate?  Can you apply whilst in the three-month mortgage payment holiday?  Will the lender take my ‘Furlough’ pay as income?  And so on.

At times like these, changing your rate can be a huge decision as we all look to cut costs in order to see the next few months through.  Without professional guidance, you might not only get the wrong deal, but you might also miss it.  A wide number of lenders have withdrawn products recently, yet only advised us the day after the products were withdrawn.  Some lenders, due to the volatility of the markets, have even reviewed full mortgage applications in with them, and withdrawn their initial approvals!  Worse, some have actually withdrawn fully issued mortgage offers! 

This is a sign of the times and now, more than ever, you should be using your local mortgage broker.  Just like the local shops competing against the supermarkets, everyone is struggling and that little mortgage product transfer you’re doing through the smart phone app to your high street lender, could be vital income to the broker who may have helped you out so many times in the past.  Don’t cut them out, let them help and advise you.  It is unlikely to make a difference to you in terms of rate or fees, but it can make a huge difference to income being generated for the mortgage broker in these challenging and difficult times.

Generally, the housing market is coming to a standstill as the Government requests everyone to stay at home.  This means that surveyors cannot visit the property and therefore a lender cannot lend on a property it has no idea of the value on.  There are remote systems that can provide Automated Valuations (AVM), but only a few lenders will currently take these as a base to which they can lend to and the risk curve will only allow an AVM up to 85% loan to value. In the main, most lenders will only allow 75% AVMs at the moment and only on re-mortgages.  As we all get used to working from home, this may change.

Yet, through adversity, there are rays of sunshine!  A number of lenders are looking at ways to increase volumes, reach out to help customers and keep the market going.  Some of these will be offerings only available through the broker market channel.  So, keep in touch, keep the relationship close and let’s work together to achieve the best outcome.  We are fully functional and working from home during normal business hours.  We continue to offer our free advice service, so speak to the team and we’ll help you as best we can.  Keep well.